In this episode, I discuss conventional wisdom which states that as you get older you should move away from equities and into fixed income assets. What is the right approach for you? I cover the following in this episode:
- Should you move away from dividend stocks?
- Two dividend stocks return over 126% vs a term deposit's return of 48%
- Is fixed income safer than dividends?
- Can dividends beat inflation?
- Benefits of staying invested in dividend stocks
Link to download the Simply Investing Forecasting Google Sheet:
https://docs.google.com/spreadsheets/d/1kN1RgR9Tojnz78Peq2y_S-ZoV4lHKYJ2TJnXgPaRAyk/copy
Disclaimer: The views and opinions shared on this channel are for informational and educational purposes only. Simply Investing Incorporated nor the author and guests shall be liable for any loss of profit or any commercial damages, including but not limited to incidental, special, consequential, or other damages. Investors should confirm any data before making stock buy/sell decisions. Our staff and editor may hold at any given time securities mentioned in this video/course/report/presentation/platform. The final decision to buy or sell any stock is yours; please do your own due diligence. Stock buy or sell decisions are based on many factors including your own risk tolerance. When in doubt please consult a professional advisor. No advice on the buying and selling of specific securities is provided. All trademarks, trade names, or logos mentioned or used are the property of their respective owners. For our full legal disclaimer, please visit our website.
In this episode, I discuss conventional wisdom which states that as you get older you should move away from equities and into fixed income assets. What is the right approach for you? I cover the following in this episode:
- Should you move away from dividend stocks?
- Two dividend stocks return over 126% vs a term deposit's return of 48%
- Is fixed income safer than dividends?
- Can dividends beat inflation?
- Benefits of staying invested in dividend stocks
Link to download the Simply Investing Forecasting Google Sheet:
https://docs.google.com/spreadsheets/d/1kN1RgR9Tojnz78Peq2y_S-ZoV4lHKYJ2TJnXgPaRAyk/copy
Disclaimer: The views and opinions shared on this channel are for informational and educational purposes only. Simply Investing Incorporated nor the author and guests shall be liable for any loss of profit or any commercial damages, including but not limited to incidental, special, consequential, or other damages. Investors should confirm any data before making stock buy/sell decisions. Our staff and editor may hold at any given time securities mentioned in this video/course/report/presentation/platform. The final decision to buy or sell any stock is yours; please do your own due diligence. Stock buy or sell decisions are based on many factors including your own risk tolerance. When in doubt please consult a professional advisor. No advice on the buying and selling of specific securities is provided. All trademarks, trade names, or logos mentioned or used are the property of their respective owners. For our full legal disclaimer, please visit our website.
Conventional wisdom states that as you get older, you need to get out of equities, meaning sell your stocks and get into fixed income assets like term deposits. But is that the right approach for you? Stick around in this episode and we're going to answer that question. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. This episode is divided into two parts, so in the first part, we're going to review the conventional wisdom around getting out of equities and moving into fixed income assets. After that, we'll get into our part two, which is what is the right approach for you.
Speaker 1:Now, before we begin, I just need to cover a couple of things here. I am not a financial planner or a financial advisor, so I don't get into budgeting, tax planning or estate planning. My focus and the focus here at Simply Investing is laser focused on helping you to figure out what is the best way to invest your money for the long term. So remember you should always have money set aside for emergencies and for your short term needs. So this is typically cash or assets that can be liquid very quickly so that you can use the money when you need it. So for the rest of this episode and all of our episodes here in the Simply Investing Dividend Podcast, our focus is always on long term investments.
Speaker 1:So let's get started with our episode, and we're going to start with our first part, looking at conventional wisdom. So conventional wisdom states that when you're younger, you could be, or should be, 100% invested in equities, meaning stocks. Then, as you get older, in your 30s, 40s, 50s and 60s you got to start selling some of your stocks and start putting that money into fixed income assets like term deposits, cds, certificates of deposits, gics here in Canada that's what we call them or even bonds. So that's the conventional wisdom. That's what everybody will tell you. When you're younger, you can be invested 100% in equities, but as you get older, you want to sell those stocks and get into 100% fixed income. Now, is that really the right approach for you? It might be if you are investing in non-dividend stocks. So you have non-dividend stocks in your portfolio, or you're investing in risky stocks, ipos, startups, any of those types of companies or you only started investing in stocks less than five years ago, because that is such a very short period of time to stay invested in the stock market. And, lastly, if you're investing time horizon is less than 10 years. So let's say you're already 75 or 85 years old. You don't have a lot of time. You're not going to be invested in the market for the next 20, 30, 40 years. Your time horizon is 10 years or less. So if any of these four bullet points up on the screen, if they apply to you, then you may want to consider putting some of your money in fixed income assets. Maybe not all of it, maybe some of it, but you have to figure that out.
Speaker 1:However, if none of these four bullet points apply to you, then we can move on to part two in this episode. What, then, is the right approach for you? So this approach is gonna work for you if you have invested in quality, dividend paying stocks I'm gonna talk about quality towards the end of this episode, but that's important Quality dividend paying stocks, not just any stock that pays a dividend. Now, this approach is also gonna work for you if you've been investing for more than 10 years, which means you're a long-term investor. You've gone through some ups and downs in the market and you are in it for the long haul, which is our last bullet point here is your investing time horizon is 10 years or more. So if any of these points apply to you, then the right approach here is to stay invested in quality, dividend paying stocks. So then you might be wondering then why is this the right approach? Why would I do that? It sounds simple, but why would I do that? So I'm gonna share with you two real-life examples and we're gonna look at the two companies up on the screen. We're gonna start first with CIBC. So this is a large bank here in Canada. So imagine back in 2010, if you purchased 300 shares in CIBC and the price of each share back then was $31.95. So that's a total investment of $9,585. Now you can see up on the screen here.
Speaker 1:Cibc has increased their dividend every single year Since 2010,. You can see that the dividend has gone up every single year. Now, if we start off at 2010,. Back then the dividend was $1.74. If we take $1.74 divided by the purchase price, which I mentioned was $31.95, you can see that the dividend yield at the time was 5.45%. So in the first year you would have received $522 in dividends. Today, as of this recording, the dividend is $3.48 a share. Let's divide that by your purchase price and your dividend yield based on your purchase price today is almost 11%, and this year you would receive over $1,000 in dividends just from CIBC. Now, if we add up all the dividends since 2010, you can see that you would have received over $10,300 in dividends. Now, remember, your initial investment was only $9,585. So you can see that this investment has done quite well since 2010. And, as of this recording, if we take today's share price, multiply it by the 300 shares that you have, add up all the dividends received since 2010, the total value of the investment today would be worth $27,882. Again, not bad and it's a pretty good return.
Speaker 1:Let's move on to our next company, tc Energy. So let's say, back in 2000, you purchased 185 shares in TC Energy and the stock price at the time was $13.40. That means your initial investment would have been $2,479. Here up on the screen, the story is very similar to CIBC. You can see that TC Energy has increased their dividend every single year. Back in 2000, the dividend was 80 cents a share. Today it is $3.72 a share. If we take today's dividend divided by the purchase price, you can see that the dividend yield is now 27% 27.76% to be exact and you can see that since 2000, you would have received over $8,700 in dividends. So you can see in this example, you've already more than tripled your investment just from the dividends alone.
Speaker 1:So why would I take and in this case this is my real life example, this is my personal holdings in TC Energy. Why would I ever sell this investment in TC Energy, where I am now earning 27.7% return every year just from the dividends? Why would I ever sell this and put it into a fixed income that's gonna pay me 4%, maybe 5%, at a fixed interest rate per year? It doesn't make any sense. And here's the other thing with dividends Every time the dividend is paid to you, your risk goes down. Every time the company increases the dividend, your risk goes down.
Speaker 1:Now, as of this recording, it's been a little while. I haven't checked the stock price. It's probably I think it's trading around $50 a share. Do I care if the stock price drops tomorrow to $40 a share or even $30 a share or even $20 a share? Not really. I've more than tripled my investment just from the dividends alone and every time I receive dividends every quarter. That is just pure profit at this point, because the investment itself has been paid for just from the dividends alone.
Speaker 1:So we can see that TC Energy. The initial investment was $2,479. I've received over 8,700 in dividends. So if we add up all the dividends plus the share price as of this recording, the total value of this investment in TC Energy is now worth $17,982. So now we're gonna take a look at future growth and we're gonna try to compare apples to apples. So we're gonna look at 10 years what would the dividend stocks be worth 10 years from now? And then we're gonna compare it to what would that same dollar amount if we put it into a fixed income investment. So that could be a term deposit, gic, a CD or a bond where the interest rate is fixed for the next 10 years, and we're gonna see which one of these investments is gonna put us further ahead. So to be able to figure that out, I'm gonna be using the Simply Investing Google Sheet. This is available to you at no cost. I'll put a link down in the description below. You can download this from our website and then you can plug in your own numbers.
Speaker 1:Now the only thing you need to change here are the cells that are in green, and there's only four of them. So step one start with the starting balance how much money you have available to invest. So put that in there in step one. In step two are you going to invest any additional money every year? If not, just put a zero in there. But if you are, let's say you're gonna put another $100 a month, another $50 a month, then let's add that in there as an additional investment each year. Step three you can put the dividend yield. By default it's set at 3.5%, but you can certainly change that number. And then step four is the stock price growth. Again, we've set it at the default as 4.5%. You can change that to six, seven, eight, nine percent or whatever number you want. Now remember, this spreadsheet is for estimating purposes only. It's not a guarantee of future returns, but you can certainly put your own numbers in here and then be able to get an approximation of what you think your investments will be worth in the future.
Speaker 1:Okay, so let's get back to our episode here. So I've already taken these numbers and I've put them into the Google Sheet. So what we're gonna focus on here is, for CIBC, we're gonna take the total value of the investment today. So that's, if I sold all of the stocks plus the dividends I've received over the years, this is how much money is sitting in that investment in CIBC $27,882. We're gonna do the same thing with TC Energy and so the total value today in TC Energy is $17,982.
Speaker 1:So let's put both of those numbers in a very simple table and you can see it up on the screen now. If we add up those two numbers, you can see that the total investment, total value of our investment today in CIBC and TC Energy is $45,864. When we put that into the Excel spreadsheet with our approximate estimates for dividend yield and stock growth, we can see that after 10 years our investment in just these two companies will be worth over $103,000. And then the total number of dividends earned in both of these companies over the next 10 years will be a little over $27,000 in dividends. So now what we're gonna do is we're gonna take the total and value of the investment today, so not 10 years from now, just for today. So you can see that our value is in CIBC and TC Energy is $45,864.
Speaker 1:Let's say we were to sell both of those stocks, take that cash and put it into a 10 year term deposit, giving us a fixed interest rate of 4%. Again, you can change the numbers in the Google sheet. You can add your own numbers in there, but for now we're gonna go with 4% over the next 10 years, just as an example. And so let's see what that investment is gonna be worth 10 years from now. And you can see that when we enter the numbers in after 10 years, our investment in the term deposit or a bond or a GIC or a CD, after 10 years will be worth $67,889. So that is a lot less than our investment in those two dividend stocks which we estimate would be worth over $103,000.
Speaker 1:And you can see that the interest earned in the term deposit over 10 years, and we add up all the interest every year, comes out to $22,025. And again, that is less than the dividends we would have earned in those two companies over 10 years, which came out to $27,215. So in this case you can see clearly up on the screen you're gonna earn more in dividends as a one compared to interest, and the value of the investment is gonna be much higher compared to what the value of the term deposit will be after 10 years. And that value includes the interest earned over the last 10 years. So now, if we put another column into our table, you can see that the total return in the term deposit was 48%. The total return with those two stocks was 126%. So that is a huge difference, and then return that you can get with dividend stocks versus what you can get in a term deposit. Now, we only did this for 10 years. If we do it for 15 years, 20, 25, 30, 40 years, the difference is gonna be much, much, much more. So keep that in mind when you're thinking about pulling money out of stocks as you get older and start putting it into fixed income assets. Now here's the thing with the fixed income assets the interest rate is fixed. It doesn't change. So if you have a five year term deposit or a 10 year term deposit, the interest rate doesn't change. So sure, you're guaranteed your capital is gonna come back to you, but the interest rate hasn't changed. Whereas with dividend stocks, not only are you getting dividends that continue to grow and we'll see that in a second there is also capital appreciation as the stock price goes up over time, and every time the dividend is increased, it helps to boost up the stock price as well.
Speaker 1:Now some of you might be thinking well, aren't fixed income investments safer than dividends? Now I know, when it comes to stocks, people think, well, stocks are risky. And when it comes to dividends, people think, well, dividends are not guaranteed. The company can cut a dividend or reduce it any time they want. And that's true, that's possible. But that's why we don't invest just in any dividend stock. We invest in quality dividend stocks. I'm gonna show you later in this episode how to figure out when you're looking at a quality dividend stock. So sure, dividends are not guaranteed.
Speaker 1:However, let's take a look at the next slide here and hopefully this will give you some level of confidence in dividend paying stocks. Now here, this is a very small example. I'm only showing four companies up on the screen here, but there are much more companies out there that are providing dividends for a very long time. But let's just take a quick look at the four examples here. Coca-cola has been paying a dividend since 1893 and has consecutively increased its dividend each year for 60 years. Johnson Johnson has had 61 years of consecutive dividend increases. They've been paying a dividend since 1944. Procter Gamble has had 67 years of consecutive dividend increases and they've been paying a dividend since 1890. Stanley Black Decker has been paying a dividend since 1876 and they've had 56 years of consecutive dividend increases. Like I said, the list of companies is much larger. It's probably last time I checked there's probably over 40, 50 companies that have been consecutively increasing dividends for more than 25 years.
Speaker 1:Think about how many market crashes we've had in the last five decades, how many recessions we've had in the last five decades, but yet companies like these have continued to not only pay a dividend, but to grow the dividend year after year after year. So that's what you have to compare it against. When you're looking at fixed income assets. They're providing you with an fixed interest rate that doesn't change over the period of your investment. Dividends, on the other hand, might be smaller in the beginning, might pay a little less, but over time, the dividends will continue to grow and over time, you will start seeing double-digit returns and eventually the dividend yield on cost will beat inflation. Here's on the screen an example of four Canadian companies, four different companies. We have Canadian Natural Resources, we have Fortis, balanced CIBC, and you can see, had you invested in any of these companies back in 2012 and held on to those shares today, the yield on cost with CNQ would be over 13%, fortis it would be over 7%. With Bell over 9%, cibc over 9%. So eventually, and again. These companies have a history of growing dividends. Next year they're going to increase the dividend again, hopefully, and then increase it again, and the dividend yield on cost will beat inflation.
Speaker 1:Okay, I'm going to leave you with one last quote before we close off our episode here, and this comes from Henry Ma, who's the author of the book called Salary for Life, and in the book he says because capital preservation is always a concern for older investors, I strongly recommend that all stock investments be made in the highest quality dividend growth stocks you can find. Don't speculate or seek higher yielding stocks. Stick with the best of the best and take comfort in knowing that your investments will be safe and more productive than any fixed asset product. So I think it's very well said. I have nothing more to add in there. We've covered a lot of things in this episode today.
Speaker 1:So keep in mind dividend stocks provide you with reliable and growing dividend income each year. They provide you with protection against inflation. If you want to learn more about that, go back and watch episode 11, where that's all I talk about is how dividend stocks will beat inflation over time. Now, dividend stocks can also provide you with capital gains because, like I said, every time the company increases a dividend it supports a higher stock price and stock prices eventually will come up. It doesn't happen right away, but over time they do come up.
Speaker 1:And then the next other benefit is the taxation on dividends is much, much lower than on interest income. Because any interest you get from a fixed asset again outside of a 401k, outside of RSP or TFSA or IRA, any of those registered accounts, so outside of those, if you're earning interest, you're going to get a lot of money that's going to be taxed as income. So that's going to be at your highest tax bracket, whereas dividends are going to be taxed much less. Then, lastly, you don't have to worry about a maturity date. With term deposits it could be a three-year term, a two-year term or a five-year term. You got to make a note of when that's going to mature. You have to remember to call your bank, go back in there and then decide either you're going to take the money out or reinvest it for another two, three, four, five years. With dividend stocks you don't have to worry about any of that. So does this mean that you should go out and buy any dividend stock today? And the answer is no.
Speaker 1:There's a couple of more things we need to look at, and our approach to investing is to invest safely and reliably for the long-term. We want to make sure we're getting dividend income every year, regardless of what happens in the stock market. So how do we do that? We invest in quality dividend stocks when they're priced low. So how do you know, when you're looking at a stock, if it's priced low and how do you know that it's quality stock? So for that I've created what I call the 12 rules of simply investing. You can see them up on the screen here. This becomes your checklist.
Speaker 1:If a company fails even one rule, skip it, move on to something else. Rule number one says do you understand how the company is making money? If not, skip it, move on to something else. Rule number two 20 years from now, will people still need its product and services? Rule number three does the company have a low-cost competitive advantage? Rule number four is the company recession-proof? Rule number five is it profitable? Rule number six does it grow its dividend? Rule number seven can the company afford to pay the dividend? Rule number eight is the debt less than 70%? Rule number nine avoid companies with recent dividend cuts. Rule number 10, does the company buy back its own shares. Rule number 11, is the stock priced low. So there's three things we check in there. We look for the PE ratio, we look at the current dividend yield compared to the 20-year average dividend yield and then we look at the price-to-book ratio as well. If the company meets all three conditions, then it passes rule number 11. And rule number 12, keep your emotions out of investing.
Speaker 1:So for those of you that are interested, I've created an online Simply Investing course. The course is self-paced. It's in 10 modules. In module one, we cover the investing basics. Module two, we cover the 12 rules of Simply Investing with real-life examples. Module three, you learn how to apply the 12 rules using a Google Sheet. Module four, you learn about the Simply Investing platform. Module five placing your first stock order and I show you how to do that Step by step. Module six building and tracking your portfolio. Module seven went to sell, which is just as important as to knowing when to buy. Module eight reducing your fees and risk, especially if you have mutual funds, index funds and ETFs. Module nine, your action plan to get started immediately.
Speaker 1:And module 10, I answer your most frequently asked questions and we also have a Simply Investing platform. It's an online web app and in that application we track over 6,000 stocks in the US and in Canada and we apply these rules to those companies every single day. So the platform can tell you immediately which stocks to consider for investing and which ones to avoid. So if you're interested in the course or the platform, you may wanna write down our coupon code, save10. S-a-v-e-1-0. This coupon code is gonna give you 10% off of our course and our platform. If you enjoyed today's episode, be sure to hit the subscribe button. We have new episodes out every week. Hit the like button as well, and for more information, take a look at our website simplyinvestingcom. Thanks for watching.